- Price action characterised by traditional risk-off on global growth fears.
- Top Japanese officials meet but rhetoric does not signal any urgency for JPY intervention.
- US and UK services PMI important for first signs of Q3 performance.
Price action in currency markets is being characterised by “risk-off” with a move away from risk and into the traditional safe havens; AUDCHF having
plunged 4.35% over the past two sessions, the S&P 500 overnight closing 2.40% below its 200-day moving average and gold have continued to mark new highs despite a stronger USD in the background. We put this down to signs that the global growth outlook may be worsening, with weakness not only in the US and Europe, but also APAC. A case in point was today’s Australia retail sales release which showed the third straight month of weak growth in real terms.
Key Japanese officials including the BoJ Governor, Finance Minister and Economics Minister met today adding fodder to speculation that we may see JPY weakening intervention. Officials must be closely watching the market given that Japanese retail margin traders have an extremely extended USDJPY long. Open interest for long positions is now at 417.5K, well above 363K in early March just before the earthquake/tsunami struck Incidentally, BoJ Shirakawa attributed the JPY surge back then to a retail unwind, and not repatriation flows which was consensus thinking at the time. With this retail position prone to capitulation- in turn reinforcing a stronger JPY and higher volatility- there is a credible rationale to intervention from a “market stability” point of view. However, for this monetary policy would first need to be consistent and the Bank of Japan would need to consider or at least signal more aggressive easing measures (see market focus for more). In this regard, Governor Shirakawa’s comments today (JPY has risen sharply but USD has weakened against other currencies as a whole) provides less confidence to the view for near term intervention.
Following the resolution of the US debt ceiling yesterday, both Fitch and Moody’s maintained the US AAA rating though the latter assigned a negative outlook. However, we would argue that the market has already become more consumed with the troubles in Europe. Italian and Spanish bonds spreads continue to widen over Germany. Italy remains sensitive to the rise in interest rates as the largest European debtor nation. EURUSD is likely to remain under pressure in recent ranges and we feel the key catalyst for this will be risk premia for key bond markets rising, suggesting levels closer to 1.4000 seem feasible.
Looking ahead today, the UK Services PMI will be important for GBP. Following the weaker than expected PMI manufacturing, the risk is that the Services index also shows signs of a slowdown. But with the Services sector comprising almost 70% of the UK economy a lurch towards the 50 boom-bust mark should weigh negatively on GBP since it will breed speculation that the BoE, meeting on Thursday, may engage in a more active discussion of additional QE. From the US, the ISM non-Manufacturing and ADP labour report will be critical as the first indicators for Q3. In addition, the employment index of the US ISM manufacturing is a relatively good indicator for the NFP. Downside surprise in the two indicators will potentially weigh further on equities thereby keeping US Treasuries well bid but the USD supported.
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BNP Paribas
Corporate & Investment Banking